An Italian currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. The one-year interest rate in the U.S. is i$ = 2% and in the euro zone the oneyear interest rate is i€ = 6%.
The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00.
Show how to realize a certain euro-denominated profit via covered interest arbitrage.